Tuesday, September 05, 2006

Risk and Housing

Housing -- The importance of housing cannot be over-emphasized. Think of it this way -- the US economy represents about 25% of the entire world economy. Buying by US consumers represents almost 70% of the US Gross Domestic Product. The wealth of US consumers lies mainly in their homes. If there's a major decline in US housing, it will affect the entire world economy.

Affordability has to do with how much a buyer must earn in order to afford a home. I've written many times that when you buy a house you can figure the total annual cost will average about 10% of the purchase price (mortgage cost, taxes, upkeep, repairs, gardening, loss of interest on the money you put up).

I see people buying houses or condos here in Contra Costa County, and these houses can cost up to a million dollars and in many cases more. That means that these people will be spending $100,000 a year on average to carry their homes. Most of these new buyers don't make $100,000 a year. They're buying their homes with big mortgages or variable-rate mortgages often with as little as 1% down. These people figure that the price of their house will just continue to increase, and the appreciation will take care of the expenses. They're crazy, it isn't going to happen that way. In the end, they're way over their heads -- they shouldn't be buying these million-dollar houses, they can't afford these houses, and in the end they'll be tossing the house back on the market rather than accepting the endless losses.


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